Editor’s note: This is the second piece in a two-part installment about fantasy sports gaming and the racing industry. Part one in yesterday’s TDN examined how the concept is considered both a threat and an opportunity for the sport.

The Stronach Group has always operated with a touch of iconoclastic flair, taking its corporate cue from maverick founder Frank Stronach. In the wake of increased regulatory scrutiny and a wave of critical press about the legality of daily fantasy sports (DFS) gaming, one of its executives, Scott Daruty, was blunt when testifying at an Oct. 21 California Horse Racing Board committee meeting how if and when DFS is declared explicitly legal, Stronach tracks intended to pursue licenses to offer fantasy gaming.

Daruty’s words stood in stark contrast to remarks made-or rather, not made-by other non-commenting racing entities in recent weeks. The New York Racing Association, which earlier in the year had entered into a partnership with DFS provider DraftKings, won’t speak on the subject and now appears to be distancing itself from fantasy gaming. Churchill Downs, Inc., (CDI) has similarly rebuffed TDN’s attempts to elicit a quote from any of its racino executives about the topic.

But Daruty wasn’t stopping at fantasy team sports gaming when it came to calling out perceived threats to Santa Anita and Golden Gate Fields, the tracks whose interests he was representing at the meeting, or Monarch Content Management, the Stronach-controlled simulcast signal brokerage of which he is the president.

“I view fantasy horse racing as a very significant threat to our existing business model,” Daruty said. “There’s at least one business out there, DerbyWars is the name, they’re effectively running an online advance-deposit wagering (ADW) company without paying anything back to the industry. They don’t pay house fees. They don’t contribute to purses. This is an online business that every day on every race, including races from Santa Anita or Del Mar or Golden Gate Fields or any other track in California, they’re offering their players a chance to bet money and win.”

Daruty continued: “And granted, they’re not betting on the outcome. They’re not betting who is going to be the winner of the sixth race at Santa Anita. But what they’re betting on is ‘piece together enough races that we can hide under the fantasy umbrella.’ And effectively what they’re doing, in my opinion, is stealing our product.”

Mark Midland, the founder Horse Racing Labs, the Louisville-based company that owns DerbyWars, was not in the room at that CHRB meeting to defend his online fantasy horse racing site. Nor, when interviewed by TDN two weeks later, would he riposte in direct response to Daruty’s parries.

But if he chose to, Midland would be a worthy verbal sparring partner for anyone in the racing industry who wished to debate whether DerbyWars and other fantasy horse racing products are thieving from the very sport they were ostensibly designed to help and support.

Over the past two decades, Midland has held executive positions with CDI, Louisiana Downs, and Youbet.com. He was a force behind innovations like the Kentucky Derby Future Wager (1999), establishing 20-horse wagering in the Derby (2001), and the daily guaranteed Pick 4 at Hollywood Park (2003). In 2009, Midland helped launch Horse Racing Nation, an online fan site that now gets 7 million visits a year, and he has often been invited to speak at various racing industry conferences to discuss the role of technology in recruiting and keeping customers.

“In 2011, we launched Derby Wars, because we saw the growth in fantasy sports, and we thought, ‘Here’s an opportunity to do horse racing contests better in a fun, engaging way,'” Midland said. “We see the growth in DFS as nothing but positive, both for Derby Wars per se, and for the industry.”

Midland continued: “I would look at DFS as a rocket ship that’s taking off. And to the extent that horse racing can be involved with it, I think it’s a huge opportunity. If you look at the NFL, interest and ratings are skyrocketing, and it’s because people are invested in the games, both season-long and in daily fantasy. I think horse racing in some ways has a more exciting game that just needs to be packaged a little better.”

DerbyWars operates its horse racing contests similarly to DraftKings or FanDuel. A glance at the site’s offerings for last Saturday, Nov. 21, showed no fewer than 60 different games based on racing from all around the country, searchable by categories such as Head 2 Head, High Stakes, $5 and Under, NHC Qualifier, and Survivor. The site explicitly states that it does not offer any form of online betting. But DerbyWars’ home page also has prominent postings that read “Play for free or real money” and “Over $20-million paid out in winnings!”

Derby Jackpot and Race Track Warriors are two other horse racing fantasy sites that offer game play similar to DerbyWars. BetAmerica is an ADW site that recently introduced a fantasy gaming component. But according to Midland, “we see ourselves not only as a leader in terms of the best site and the biggest games, but also the strongest adherent to rules and guidelines as set forth by the Fantasy Sports Trade Association.”

When faced with accusations that DerbyWars is taking something from the industry without paying for it, Midland points out that DerbyWars contests are skill-based games based on information that exists in the public domain. He added that the site does not in any way make use of “content,” because DerbyWars does not stream any live or archived videos of races on its site.

“It’s a game of skill because you’re playing in a contest against other players,” Midland said. “The picks that you make create the fantasy points that create a leaderboard that determines the outcome of the game. There’s also additional skill involved in managing your picks as to where you are on the leaderboard. ‘Gambling’ is defined as wagering on a direct outcome, like wagering on a horse in a race.”

But the bigger point that critics of DerbyWars are missing, Midland said, is failing to recognize that fantasy racing returns to the industry benefits not measured so much in dollars, but in terms of fan education, product exposure and cross-promotional marketing.

Midland said surveys of DerbyWars customers indicate that they split their available bankrolls 80/20 in favor of pari-mutuel wagering versus contest play. He added that for newcomers, learning about the sport on a smart phone with various social tutorials enabled can be a less intimidating introduction to betting than a day at the races at an actual track.

“It’s much more readily adoptable for younger fans,” Midland said. “We’re also seeing great success with dormant fans. We’ve had many players at all levels who have given up on racing over the past five to 10 years, and have actually come back to racing through contests, opened ADW accounts, and become significant players.”

Corey Johnsen, the president of Kentucky Downs, told TDN that his track partners with DerbyWars for precisely those reasons.

“I think the law is clear. Once a race is run, it’s in the public domain, and people can utilize those results,” Johnsen said. “I think it’s a good thing, and I would challenge anybody who has a racetrack signal that we need to have more fan-education strategies and marketing plans. If we all just guard our little fiefdoms, where’s the development? There’s got to be a balance there.”

John Ford is the founder and president of BAM Software, which operates BetAmerica. He testified at the CHRB meeting that his company launched fantasy sports gaming in 2013 and that they “haven’t made a dime off it yet.” But that hasn’t stopped BetAmerica from recently launching a fantasy horse racing portal, because “if I have a customer who’s doing the work to enter a handicapping contest, he’s likely to use that knowledge that he’s gathered in creating that handicapping entry to then go make some pari-mutuel wagers and contribute to the pari-mutuel pool.”

Ford continued: “We see it different from the big fantasy guys that are out there that are billion-dollar companies. We see fantasy [as an] opportunity for the industry to pull in and promote pari-mutuel wagering to these customers that are statistically involved in their sport…I can’t overstate the significance that we believe fantasy offers for horse racing, because this is the group that we don’t have, and they are looking at stats like you wouldn’t believe.”

Midland said he recognizes that for some bettors, a big “super Saturday” program filled with stakes races might be one reason to get excited about handicapping. For others, a Pick Six carryover or a guaranteed Pick Four pool might be their motivation to get involved. For midweek and night racing on smaller circuits, he said the DerbyWars slate of contests should also be considered a viable path to pari-mutuel participation.

Midland gave the example of a DerbyWars partnership with Hawthorne Race Course on Tuesday afternoons in which a survivor-style contest for $4 directs potential bettors to a track and time slot they otherwise might not consider playing.

“So for $4, you might invest time to handicap the whole card, and then be interested in wagering on those races online,” Midland said. “For $4, several hundred players are handicapping seven or eight races on a Tuesday that they would not normally look at. There’s tremendous upside from an engagement standpoint.”

Daruty, based on his CHRB testimony, still doesn’t buy that concept.

“It may very well be that [fantasy racing] could contribute to the industry,” Daruty said. “And maybe if they were willing to pay host fees that go to the racetracks and to the horsemen, then maybe we would welcome them and say, ‘Please offer your fantasy contests on our horse races.’ As Mr. Ford said earlier, maybe that ends up bringing in a different demographic. It might be a good thing. But what I can say, in my opinion for sure, it’s not a good thing if they’re stealing our product and not paying us anything for it.”

Daruty continued: “We think there are some arguments that can be made that even if fantasy sports is determined to be legal because it’s a game of skill, that fantasy horse racing arguably is subsumed by the Interstate Horse Racing Act and other federal law that would, therefore, require regulator and racetrack and horsemen approval. So we’re trying to fashion an argument to shut them down and prevent them from stealing our product… They’re not paying the tracks that are running the races. They’re not paying the horsemen who are putting on the show. And I think we’ve got to take a very hard look at that.”

This brings up the important issue of whether any of racing’s fledgling fantasy racing sites actually have any money to contribute to horsemen and racetracks. DraftKings and FanDuel, the major players in the DFS market, are both valued at over $1 billion, yet neither is reportedly profitable. What’s the financial picture like for DerbyWars?

Midland said Horse Racing Labs, the owner of DerbyWars, does not currently make money. “We do not because we invest any growth that we have into marketing, growing the company, and additional hires,” Midland said. He added that the company employs 12 people, has been funded so far by “angel investors,” and is actively seeking additional funding to grow faster.

“Start-ups exist to find opportunity and growth, and that’s something that horse racing direly needs,” Midland said. “And if a start-up doesn’t grow, it dies. So start-ups have extra motivation to become successful that an established corporate entity does not.”

But there is another hard truth about start-ups, and it applies to the business models of all sorts of different companies in many diverse industries: Their ideas often make sense theoretically, but don’t always come to fruition, or even deliver the desired results, in real life. Are the tracks that support fantasy racing getting the tangible results that entrepreneurs like Midland, Johnsen and Ford describe? And what about other entities that have dabbled in fantasy racing only to back out of it?

John Hindman, the general counsel for Television Games Network (TVG), testified at the CHRB meeting that the racing channel tried online fantasy horse racing about four or five years ago, “and we discontinued it because it was not an efficient way of generating pari-mutuel customers.”

Hindman elaborated: “Around the same time we also closed down a contest site that we had that were just free contests to get people used to the machinations of how to bet and how to play. We closed that at the same time, too, because I could literally have counted the active customers that we got in pari-mutuel wagering on my two hands.”

Hindman said that in light of the subsequent boom of fantasy sports, TVG recently commissioned a new study to gauge customer interest. “And it was surprisingly low, the number of our customers who had tried daily fantasy, and lower than we thought it would be. And also there was no indication that those who had tried it had changed-that 85 percent of those who had tried it said that it hadn’t changed their habits for pari-mutuel wagering at all.”

John Walsh, the assistant general manager at Hawthorne, described to TDN more of a wait-and-see relationship that the Chicago track has with fantasy racing.

Walsh said he can definitely assert that Hawthorne has lost customer dollars to fantasy racing. But he views it like partnering with an ADW: Sure, Hawthorne would make more money if people came to the track and bet. But since ADWs are here to stay, and since customers seem to prefer them, he’d rather partner with ADWs–even if it means taking a lesser cut of handle–than fight them.

Walsh said he feels similarly about partnering with DerbyWars. He likes the concept. He likes the affordability that customers enjoy. And the Hawthorne survivor contest fills every single Tuesday, which he hoped would lead to an increase in handle.

“But those survivor people, they bet the survivor [contest] and that’s the extent of their wagering for the day,” Walsh said. “It doesn’t really turn them into [high-volume customers] betting on your own races. I don’t think so. I haven’t seen it.”

But what Walsh has seen from fantasy contests in general is a new breed of horseplayers.

“I think what fantasy has done, kind of like poker tournaments did, is people now look to win a lot of money by risking a small amount of money,” Walsh said. “Where before you might have been happy to bring a hundred to the track and head home with two or three hundred, now for that same hundred, people want to win ten or twenty thousand. Or get into the NHC contest. Something big.”

Still, Walsh is willing to gamble that fantasy racing might provide measurable benefits down the road that aren’t yet obvious.

“For DerbyWars, we’ll definitely continue doing it. Because it’s going to happen anyway, and why not at least see what’s going on with them? Walsh said. “It’s a way for newcomers to participate, to potentially learn that this sport is cool. Derby Jackpot is another very low-priced thing that people do get excited about. Now I don’t know if those customers ever bet again after trying it, but three, four, five years down the road? Those two [companies] are something totally different that [racing] hasn’t seen before. So why not help them? Those could turn out to be significant introductory paths to racing. The future is important.”

That sentiment is something Midland has been trying to hammer home for quite some time now, long before he even conceived of DerbyWars.

“In my mind, one of the biggest problems in racing, if not the biggest problem, is the lack of innovation,” Midland said. “Not only has racing completely missed the boat, there is nobody really working on it. Not only is there no ‘hotbed of innovation’ for racing, there is almost no innovation. And I think when you don’t have innovation, how do you have growth? If I was a breeder or a track owner, that would be a very big concern. But nobody is actually investing in the future growth of racing.

“There was some reference at the CHRB meeting about DerbyWars being a threat to the revenue model. But the current model has gone from $15 to $10 billion [in handle] in a decade. There are already serious, serious issues with the current model. The decline is precipitous. So I think it’s extremely critical to look for new opportunities for growth. Things are declining so fast that any new opportunity should be embraced as a positive opportunity.”
@thorntontd